Stimulus Aid Yanks States' Spending Leash

Badly needed new cash requires levels of funding that may be hard to meet.

With state budgets tighter than ever as the second—and final—big pot of federal economic-stimulus money is about to fill their coffers, states are finding it harder than ever to keep up their end of the funding bargain.

States such as New Jersey continue to make midyear cuts in school funding, backing down from promises made in their initial applications for the $48.6 billion State Fiscal Stabilization Fund, the single biggest pool of education money in the American Recovery and Reinvestment Act passed last year by Congress.

And that means more and more states are finding it difficult to muster up enough cash to satisfy federal requirements that they spend as much on K-12 and higher education as they did in 2006 to receive the fiscal stabilization money.

So far, 14 states have filed waivers with the U.S. Department of Education declaring they won’t be able to meet the 2006 “maintenance of effort” level for either K-12 or higher education, in either fiscal 2010, 2011, or retroactively for fiscal 2009. Florida, Rhode Island, and South Carolina seem to be in the worst financial shape, already having requested multiple waivers from the Department of Education because they can’t fund schools and colleges and universities at 2006 levels in at least two of those three years.

Critics Mobilize

Meanwhile, some states that haven’t applied for the waiver, such as California and New Jersey, are running headlong into loud and public criticism that they’re not living up to the letter, or at least the spirit, of the federal requirements.

This comes as the second phase of the fiscal-stabilization funds begin to trickle down to states—money designed to shore up state education budgets and save teaching jobs. The Education Department has so far approved phase two funding for three states. And this comes as states—whose economic recoveries typically lag that of the national economy—continue to flounder amid a weak housing market and sluggish tax revenue.

In California, public school advocacy groups sent a letter last month to Education Secretary Arne Duncan arguing that the state is using accounting tricks to make it seem like they’re maintaining school funding at 2006 levels. The department then asked the state to respond to the allegations raised by several groups. At stake is the second round of stabilization-fund dollars for California, worth nearly $500 million.

At the heart of the dispute, which involves arguably the most complex state school finance system in the country, is what money counts toward a state’s “effort.” Although several issues were raised in the formal complaint to federal officials, one is whether California will “artificially” prepay $250 million to schools by June 30, just to meet the current year’s “maintenance of effort,” when that money is really supposed to be for the next school year.

State officials vigorously defend their calculations. And even the Government Accountability Office, the investigative arm of Congress, in a report this month on states’ use of stimulus funds, noted the flexibility the Education Department gives states in calculating their own maintenance of effort levels.

In essence, California officials say they’re counting toward their effort the money that school districts actually have to spend. At the same time, they don’t downplay the K-12 cuts that have hit districts hard, especially as state lawmakers face another $20 billion deficit for next fiscal year and as tough choices and cuts loom ahead.

“California has seen a dramatic drop in overall revenue from the continuing national recession. We know it’s been tough,” said David Richey, the assistant secretary for planning and communications for the California education secretary’s office. “Yet the percentage of funding that education has received [as a proportion of all state revenues] has actually gone up.”

In a terse response to the advocates’ complaint, California Recovery Task Force Director Herb K. Schultz said he was “disheartened” that anyone would stand between the state and much-needed money.

Yet the advocates don’t see it that way.

“That’s a pretty outrageous comment,” said John Affeldt, a managing attorney at Public Advocates, a San Francisco public-interest law firm. “The people who are jeopardizing the federal money are failing to maintain effort, not the parents and students. The state would love to shoot the messenger here.”

As of last week, the federal department had not ruled on whether they were satisfied with California’s answers.

Widespread Concern

Back in January, Iowa Gov. Chet Culver, a Democrat, foreshadowed in testimony before a U.S. Senate panel how difficult it will be for governors to meet those funding levels from 2006, which reflect a time when the national and state economies were humming along, and socking away extra money for education was easier.

“We’ve had to cut our budget ... I’m required by law to balance my

budget,” said Gov. Culver in his testimony, noting that his state applied for a waiver from maintenance of effort for its higher education funding this budget year. “We’ve been assured that we will have a waiver option if we can make the case, and I believe most governors will.”

It’s likely that as states work to craft their budgets for the next budget year—fiscal 2011—more waivers will be sought.

“The 2010-11 school year is going to be more difficult than this one,” said Michael Griffith, a school finance expert with the Denver-based Education Commission of the States. “I could see where the majority of states will have asked for at least one waiver for at least one year.”

Such waivers seem to be an almost sure-fire bet for states. The federal Education Department will not approve a waiver until after the conclusion of the fiscal year for which the waiver is requested, according to spokeswoman Elaine Quesinberry. By then, however, a state will have spent its money for that year and moved on to the next fiscal year, and the department expects that all governors will have met all of requirements to get the waivers.

Other Pressures

Meanwhile, many states are struggling to make good on funding promises in their original fiscal- stabilization-fund applications.

Mr. Griffith, of ECS, said the majority of states have been forced to make midyear cuts. At least 17 amended their stabilization-fund applications to downgrade the amount of money they could prvide for education this fiscal year, according to an Education Week review of states’ applications.

In New Jersey, several funding-advocacy groups on March 2 sent a letter to Secretary Duncan urging him to intervene to prevent a midyear funding cut for the current fiscal year. In its application for stabilization funds, the state said it would provide $5.6 billion this year for K-12 education, but the cuts ordered by newly elected Gov. Chris Christie drop that funding level by $475 million.

“The state is taking money it committed to supporting K-12 operations, which the [federal education] department approved, and diverting it in the middle of the year,” said David G. Sciarra, the executive director of the Newark, N.J.-based Education Law Center, a school-finance advocacy group. “Funds were enacted by Congress to support public education, not enacted as a catchall pot of money.”

But Gov. Christie, a Republican, defended the cuts as fiscally necessary and noted that they affect mostly districts that already have budget surpluses.

“I know this solution will not be popular,” he told a special session of the New Jersey legislature last month. “But action is required.”

As of last week, the advocates had not received a response from the Education Department.

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